IND AS 21
The Effects of
Changes in
Foreign Exchange
Rates
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Scope
• Accounting for Transactions and balances in foreign currencies
• Translation of results and financial position of foreign operations
• Translation of financial statements into a presentation currency
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Exclusions
• Derivative Instruments and balances that are within the scope of IAS 39
(Financial Instruments : Recognition and Measurement). However, this
standard applies to translation of derivatives from functional currency to
presentation currency
• Hedge accounting for foreign currency items, including net investments
in foreign operation – covered by IAS 39
• Presentation in statement of cash flows of transactions in foreign
currency or of a foreign operation ( IAS 7 Statement of Cash Flows)
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Contents
Definitions
Foreign currency transactions
Foreign currency financial statements
Disclosures
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Key Definitions
• Foreign currency is a currency other than functional currency of the
entity.
• Functional currency is the currency of the primary economic
environment in which the entity operates.
• Foreign operation is an entity that is a subsidiary, associate , joint
venture or branch of a reporting entity, the activities of which are based
or conducted in a country or currency other than those of the reporting
entity.
• Presentation currency is the currency in which the financial statements
are presented.
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Changed Terminology
AS 11
Reporting currency is The currency in which an enterprise presents Its
financial statements
IND AS 21
Functional currency is the currency of the primary economic environment
in which the entity operates.
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Primary Economic Environment
Additional indicators for functional currency for foreign operations are :• Foreign operations is an extension of reporting entity.
• Transaction with reporting entity are a high or low proportion of foreign
operation’s activities.
• Cash flows from activities of foreign operation affect the cash flows of
reporting entity.
• Cash flows from activities of foreign operation are sufficient to service
the normally expected debt obligation without funds made available by
reporting entity
If a foreign operation is integral to group, functional currency would be
normally be that of the parent.
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Choice of Functional Currency
1.
An entity does not have a free choice of functional currency.
2.
An entity cannot change functional currency unless facts and
circumstances relevant to its determination change.
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Functional currency-summary
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example
A ltd.
• Does international trading only and its purchase and sales are in $
• Us economic environment influences the sales and purchase prices
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Solution
A LTD.
 Functional currency = US dollars
 Financial statements presented in USD
 If wants to present financial statement in Indian rupees – USE
TRANSLATIONAL PROCEDURES as per IND AS
 The STATUTORY financial statements will also be required to be drawn
in INR.
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Solution
Solution
AS 11
• Branch L –presentation of financial statements in local currency i.e
pounds
• Branch J –presentation of financial statements in local currency i.e yen.
AS 21
• Branch L –presentation of financial statements in local currency i.e INR.
• Branch J –presentation of financial statements in local currency i.e yen.
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Case study 1 – Identification of functional currency
• M ltd, a subsidiary in India, purchases goods from A Inc , its holding
company in USA.
• Purchases are done in USD and are based on prices in US market.
• Its sells goods in USD and the sale price is influenced by the holding
company.
• Other expenses are incurred locally.
• M Ltd has an external commercial borrowing from A Inc for financing its
activities
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Solution
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Case study 2 – Identification of functional currency
• N ltd, a subsidiary in India, purchases goods from
company in USA.
A Inc. , its holding
• Purchases are done in USD and are based on prices in US market.
• It sells goods in INR but the sale price is influenced by the country of the
holding company.
• Other expenses are incurred locally.
• M Ltd has an external commercial borrowing from
its activities.
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A Inc. for financing
Solution
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Case study 3 – Identification of functional currency
• USA ltd (U) has a subsidiary in India , Dragon ltd. (D).
• D assembles all goods in India using a combination of locally sourced
materials and materials manufactured by U.
• All goods are then exported and sold in Australia, based on selling price
decided by U and influenced by Indian market.
• The company has a loan from an Indian bank.
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Solution
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Case study 4 – Identification of functional currency
• X ltd, a subsidiary in India, purchases goods from A Inc. , its holding
company in USA.
• Purchases are done in USD and are based on prices in US market.
• It sells goods in INR and the sale price is market determined.
• Other expenses are incurred locally.
• It remits its proceeds to the holding company.
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Solution
• Sales are in INR and are market determined whereas goods are
purchased from USA.
• The primary pictures do not give a clear idea.
• On the basis of additional factors, in the given case X LTD, is carrying
out its activities as an extension of the holding company’s foreign
operations since it only sells goods imported from the X LTD and remits
its proceeds to it, its functional currency should be USD.
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Contents
• Definitions
• Foreign currency transactions
• Foreign currency financial statements
• Disclosure
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Foreign currency transactions
Steps to account and report for foreign currency transactions:
• Determine the functional currency of all reporting entities as explained
above
• Translate the foreign transactions/items into its functional currency.
• Record and report the effect of such translation.
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Type of transactions
• Buying or selling goods or services where price is dominated in foreign
currency.
• Borrowing or lending funds when amounts are denominated in foreign
currency
• Acquires or disposes of assets or incurs or settles liabilities, dominated
in foreign currency.
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Initial Recognition
• Recognize transaction at the spot rate on the transaction date.
• May use e.g average rate for week or month as a practical
approximation
• Average rate not reliable if currency fluctuates significantly.
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Subsequent measurement
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Illustration on Revaluation
• Company Apple’s reporting currency is INR
• On 01.01.2012 company buys a building for US $100,000
• The exchange rate is INR 54.48:US$1
• Company Apple’s year end, 31st march
• The building is not depreciated as it is not available for use.
• On 31.03.2012 the exchange rate INR 55.54:US$1 and the value of the
building is US$110,000
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Solution
Initial Recognition
• On 01.01.2012 the building is capitalised at the rate
transaction date.
at the
• Building Dr……….54,48,000
To Bank Cr………. 54,48,000
Subsequent recognition
• If cost model adopted as accounting policy under IND AS 16 for PPE,
Building is carried as its historical cost hence no adjustment to be
made
• If revaluation model adopted as accounting policy under IND AS 16
for PPE, value of building to be adjusted for revised value.
• Hence the building being a non-monetary item and held at fair value,
is to be translated at the date of valuation.
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Monetary assets-Exchange gains and losses
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Non monetary assets – exchange gains and losses
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Change in functional currency
• Only if there is a change to the underlying transactions ,events and
conditions.
• Translation procedures should be applied to the new functional currency
prospectively from the date of change
I.
All items are translated into the new functional currency using the
exchange rate at the date of change
II.
Resulting translated amounts for non monetary items are treated as
their historical cost
III.
Exchange difference earlier recognised in equity shall continue to be
recognised as such
IV.
Irrevocable option if exercised the accumulated exchange difference
will continue in the same manner as before
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Illustration
A , located in Germany, is a wholly owned subsidiary of Z. $ is Z’s
functional currency. € is A’s functional currency as all the sales, purchases
and labour cost were in €. Z started using A’s facility to meet its order. A
closed down its sales department as 80% of its supplies would be to Z.Z
built a new facility to produce material required in its manufacturing
process and A started receiving all material from Z. A now expects cash
inflow and outflow, except for wages in $.
The currency of revenues has changed from € to $. it seems to be
permanent as the sales dept. has been closed. Currency of outflows has
changed from € to $. Position of within Z’s overall operating strategy has
been changed from self supporting, stand alone entity to a manufacturing
facility of Z. there will be a change in the functional currency from € to $.
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Contents
• Definitions
• Foreign currency transactions
• Foreign currency financial statements
• Disclosure
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Foreign currency financial statements
• If the presentation currency differs from the entity's functional currency, it
translates its results and financial results into presentation currency
• For consolidation purpose, if group contains individual entities with
different functional currencies, the results and financial position of each
entity are expressed in a common currency so that consolidated
financial statements may be presented.
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Characteristics of hyperinflationary economy
(IND AS 29)
• Preference of investment of wealth in a relatively stable foreign
currency/non monetary assets
• All monetary amounts are quoted in relatively stable currency rather
than local currency
• Sales and purchase on credit take place at price that compensate for
the expected loss of purchasing power during the credit period, even if
period is short
• interest rates, wages and prices are linked to a price index.
• The cumulative inflation over three years is approaching, or exceed,100
per cent.
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Translation to presentation currency-treatment 1
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Translation to presentation currency-treatment 2
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Translation of a foreign operation
• Minority interest allocated share of accumulated exchange difference.
• Goodwill and fair value adjustments arising from a business combination
are treated as asset/liabilities of the foreign operation translated at the
reporting date
• Exchange gains or loss on intra group items are taken to P/L
• Different year-ends
1.
3 months lag permitted
2.
Adjust for significant changes between reporting dates.
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Disposal of Foreign Operation
• On disposal of foreign operation
transfer cumulative amount of
exchange difference from equity to profit and loss
• On partial disposal of foreign operation
transfer proportionate
share of cumulative amount of exchange difference from equity to profit
and loss
• On partial disposal of subsidiary that include foreign operation
re-attribute the proportionate share of the cumulative amount of
the exchange difference recognized in other comprehensive income to
the non-controlling interests in that foreign operation
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Disposal of Foreign Operation
• Disposal of entire interest in a foreign operation
• Loss of control of a subsidiary that include a foreign operation
• Loss of significant influence over an associate include a foreign
operation
• Loss of joint control over a jointly controlled entity that include a foreign
operation
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Partial Disposal
• Partial Disposal of a foreign operation is a reduction in entity’s ownership
interest apart from loss of control, joint control or significant influence
which would otherwise lead to disposal of the same
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Case Study 5
• A parent has 100%interest in a subsidiary for number of year. The
subsidiary has been classified as a foreign operation and CU 5million
relating to the translation difference of subsidiary has been recognised in
other comprehensive income and accumulated in a separate component
in equity. The parent disposes 30% of its interest resulting in loss of
control. What would be treatment on date of disposal?
• CU 1.5 million (5*30%) of cumulative transaction exchange differences
are transferred within equity from foreign currency transaction reserve to
non-controlling interest .No amounts are reclassified to profit or loss.
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Case Study 6
• A parent has 80%interest in a subsidiary for number of year. The
subsidiary has been classified as a foreign operation and CU 5million
have been recognised in other comprehensive income.80% have been
accumulated in a separate component of equity and balance 20%
attributed to non-controlling interest. The parent disposes 40% of its
interest resulting in loss of control. What would be treatment on date of
disposal?
• CU 4 million (5*80%) of cumulative transaction exchange difference are
transferred from equity to profit and loss. CU 1million already reflected
as part of non-controlling interest are derecognised and included in the
calculation of the profit or loss disposal.
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Contents
• Definitions
• Foreign currency transactions
• Foreign currency financial statements
• Disclosure
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Key Disclosures
• Exchange rate differences included in:
1.P/L(except for financial instruments measured at FV)
2.OCI and Accumulated as a separate component of Equity
3.Directly in Equity and Accumulated as a separate component of equity
if irrevocable option exercised. In both cases i.e. 2 & 3 - its reconciliation
of beginning and end.
• Fact of presentation currency being different from functional currency
,date and the reason thereof
• Change in functional currency of reporting entity or significant foreign
operation the reason thereof and the date of change
• If entity display financial statements or information in different currency
without complying with Ind AS21 few additional disclosures are required.
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Disclosure Examples
Indian Companies
Foreign Companies
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